Cloud Financial Management A New Way to Plan

Cloud Financial ManagementA New Way to Plan

Jarred Clore, Amazon Web ServicesJim Robertson, CTP, Amazon Web Services

March 18, 2019

Jim Robertson, CTP (Dallas, TX)AWS Cloud [email protected] Areas:• Cloud Budgeting and Forecasting• Cloud Business Value• Finance Team Processes, Tools, and Organization

© 2018, Amazon Web Services, Inc. or its Affiliates. All rights reserved.

Your Presenters

Jarred Clore (Scottsdale, AZ)AWS Cloud [email protected] Areas:• Cloud Cost Optimization and Value Attainment• Cloud Governance and Cultural Transformation• IT Team Organizational Strategy

mailto:[email protected]

mailto:[email protected]

• Introduction to the Cloud

• Cloud Financial Management• Business Case Development & Planning• Cost & Usage Forecasting/Budgeting• Accounting for Cloud Spend• Cost Optimization

• Next Steps


Agenda

Cloud – The New Operating Model

Industrial Revolution

Cloud Revolution

Shift to on-demand computing

Shift to on-demand power

Cloud computing is the on-demand delivery of compute power, database storage, applications, and other IT resources through a cloud services platform via the internet with pay-as-you-go pricing.

• No upfront investment

• Pay for what you use

• No lengthy procurement cycle

• Ongoing innovation• No maintenance/

repair• Focus on higher

value add

Lost sales

Infrastructure cost $

Time

Largecapital

expenditure

Opportunitycost

Predicted demand

Traditional hardware

Actual demand

Automated virtualization


Economics of the Cloud

Cloud Services

Storage

Compute

Applications and Operating

Systems

Cloud computing is the on-demand delivery of compute power, database storage, applications, and other IT resources through a cloud services platform via the internet with pay-as-you-go pricing.

Infrastructure

Working Backwards from IT

What Moving to the Cloud Entails

Redesign Application/

Infrastructure Architecture

App Code Development

Full ALM / SDLC

Integration

Purchase COTS/SaaS & licensing

Manual Install & Setup

Modify underlyingInfrastructure

Determinenew platform

Retain / Revisit

Manual Config

Manual Deploy

Manual Install

Retire / Decommission

Discover/Assess/PrioritizeApplications

Determine Migration

Path

Use Migration Tools

Transition ProductionValidation

Automate

9, Amazon Web Services, Inc. or its Affiliates. All rights reserved.

Migration paths reflect:• Application portfolio• Sense of urgency• Cloud skills

Product Dev. Teams, Software Developers, IT Team, Data Scientists, Infra. Engineers, DevOps Engineers, Technical Operations, ….

How IT Feels About the Cloud

Product Dev. Teams, Software Developers, IT Team, Data Scientists, Infra. Engineers, DevOps Engineers, Technical Operations, ….

vs

Financial Planning & Analysis Teams, Procurement/Sourcing, Accounts Payable, Strategic Finance, CFO Office

How I feel about the cloud…

IT and Finance Alignment

Moving from fixed to variable-cost structure• More difficult to forecast

• Can be highly variable based on variable demand

• Cloud accounting issues

Managing and forecasting cloud costs is different• Pay-as-you-go agility from being in the cloud quickly results in costs

• Finance and IT have to understand each other better than before

• Managing cloud costs and IT cost transparency require new or different:

• Approaches to governance and organizing costs that feed reporting/allocations and budgeting/forecasting

• Forecasting methods

• Key performance indicators

Cloud Financial Management needs to become a way of life• Everyone is responsible for costs on a daily basis

• Cost needs to be more explicitly designed-in

Traditional Data Center

Operating Costs

Cloud

Capital CostsCapital Costs

Operating Costs

Cost savings from moving to cloud


Cloud is a New Operating Model for Finance


• Cloud Financial Management• Business Case Development & Planning• Cost & Usage Forecasting/Budgeting• Accounting for Cloud Spend• Cost Optimization

• Next Steps


Agenda

Cost Optimization

• Match supply & demand

• Architecture, design and service selection

• Resource types and sizing

• Pricing models

Planning & Forecasting

• Business case development & planning

• Cost & usage forecasting/budgeting

• Cloud accounting

Cloud FinancialOperations (FinOps)

• Governance & controls

• Establish culture of cost accountability

• Procurement strategy

• Build the cloud team

• Training

• Automation & tooling

Measurement & Accountability

• Account strategy

• Tagging strategy & maintenance

• Cost visibility & analysis

• Metrics tracking & monitoring

Cloud Financial Management Framework







Building a Cloud Business Case

What is it?

50%+ reduction in TCO (GE) Examples

Infrastructure cost savings / avoidance from moving to the Cloud.

Cost Savings (TCO)


Typical Initial Focus is on Cost Savings

Total Cost of Ownership is the acquisition and operating costs for running an infrastructure environment end-to-end for the same time period• Compares the costs of running an infrastructure environment or specific

workload/application on premises or in a co-location facility versus cloud• Parallels an existing cloud workload with an on premises or co-location setup

• Compares spend at the same starting point for the same period

Cloud Year 1 Year 2 Year 3 …..

On Premise Year 1 Year 2 Year 3 …..


Business Case Development: Cost

Compute

Included

Included

OS and Virtual

Licenses

Included

Possibly

Power

Included

Probably Not

Cooling

Included

Probably Not

Server Network

Included

Probably Not

Labor

Included

Possibly

Patching

Included

Probably Not

Local Storage

Included

Possibly

Wide Area Network

Included

Probably Not

On-Premise Data Center

• When conducting a comparison of cloud to an on-premises data center, make sure you include all these items below

• AWS pricing includes all of these items, so a true comparison should estimate all items for the on-premises site


Cloud

Cost Comparisons

What is it?

Launch of new products 75% faster (Unilever)

Critical workloads run in multiple AZs & Regions for robust DR (Expedia)

50%+ reduction in TCO (GE)

Over 500 hours per year of server configuration time saved (Sage)

Examples

Infrastructure cost savings / avoidance from moving to the Cloud.

Efficiency improvement by function on a task by task basis.

Benefit of improving SLAs & reducing unplanned outage.

Deploying new features / applications faster and reducing errors.

Typical Focus

Most Compelling Cloud Benefits

Cost Savings (TCO) Staff Productivity Business Agility

Operational Resilience

Building a Business Case… but compelling benefits go beyond cost that can be quantified








Cloud Spend $

Time

Forecast

Buying more cloud

Improved cost optimization


Improved financial controls

Cloud Costs Can Exceed Forecast

Forecasting Cloud CostsCo

mpl

exity

Naïve /Straightline

LinearRegression

MultipleRegression

Neural Networks

Single Point

HML

ProbabilityWeighted

Monte Carlo

Gre

ater

Less

er

Trend Analysis - Tagging OptionalForecast based on previously known results

Driver Based - Drivers RequiredForecasts based on forecast organization activity

Specify relationships between variables

• Evolution of FP&A practices

• Use as simple method as possible for accuracy, but no simpler

• Abandon a forecast method when it is worse than the naïve forecast

• Some cloud products that are not based on usage are easy to forecast and provide a predictable foundation

Known

Scenarios

Time Series/ARIMAX


Resource Tags

Accounts

Account structures and resource tags link organization activity to consumption of AWS services

AWS services can be aggregated using accounts and tags. Deciding how you do this provides the foundation for reporting, allocations, and forecasting

Link Business Activity to Cloud Costs







• Accounting for cloud spend• Prepaid vs. cash basis• Operating vs. capital

• Allocations • Purpose of allocations are to provide cost transparency

• Showbacks – good first steps to create visibility • Chargebacks – creating accountability

• Cloud allocations • Can increase if not all on-premises costs were visible and allocated• Change management requires lot of education


Cloud Accounting Topics

Cost Optimization

• Match supply & demand

• Architecture, design and service selection

• Resource types and sizing

• Pricing models


ComputeOn Demand

Pay for instances you use. The use of On-Demand instances frees you from the costs and complexities of planning, purchasing, and maintaining hardware and transforms what are commonly large fixed costs into much smaller variable costs. Pay for compute capacity by the hour or second. No long term commitment

SpotUse spare computing capacity for up to 90% off On Demand Pricing. Pay the Spot price that's in effect for the time period your instances are running. Pay per hour or for hourly increments.

ReservedBuy a reservation for an instance. Up to 75% less than on Demand Pricing. Reservation can be for one or three years, and can be paid for all upfront, partial upfront, or no upfront.

Storage and Most Services – pay as you use it


How Cloud Pricing Works

Forecast & Manage Cloud Costs

Right-Sizing Your Instances Pick the Right Pricing ModelIncrease Elasticity

Measuring & Monitoring

Match Usage to Storage Class

Design for Cost



Right-Sizing Your Instances(Resource Types

and Sizing)


What it meansSelecting the least expensive instance available that will meet your performance requirements.

Why it mattersOverprovisioned and older generation instances diminish the value proposition of cloud’s “use only what you need when you need it” principle. They cost more to run and are likely not being fully utilized.

How to do itReview CPU, RAM, storage, and network utilization metrics to identify potential instances that can be changed to the correct instance type/size.


Increase Elasticity(Match Supply with

Demand)


What it meansRunning the minimum viable amount of instances necessary that will meet your performance requirements, scaling up or down as requirements change.

Why it mattersRunning your instances 24x7 diminishes the value proposition of cloud’s “use only what you need when you need it” principle. It is unnecessary cost that yields no additional business value.

How to do itTurn off instances when not in use, especially in non-production environments. Automate start/stop on a schedule when known. Use auto-scaling groups to scale up and down based on demand and usage, such as spikes.


Pick the Right Pricing Model


On DemandPay for instances you use. The use of On Demand instances frees you from the costs and complexities of planning, purchasing, and maintaining hardware and transforms what are commonly large fixed costs into much smaller variable costs. Pay for compute capacity by the hour or second. No long term commitment.

ReservedBuy a reservation for an instance. Up to 75% less than On Demand pricing. Reservation can be for one or three years, and can be paid for all upfront, partial upfront, or no upfront.

SpotUse spare computing capacity for up to 90% off On Demand pricing. Pay the Spot price that is in effect for the time period your instances are running. Pay by the hour.

Storage and Most Services – pay as you go


Match Usage to Storage Class


What it meansUsing the most cost effective storage service based on data usage, such as retrievals, and setting up a long term data retention policy.

Why it matters“Hot” storage is used primarily for frequently retrieved data and has the highest price point. “Warm” storage is used for data that is infrequently accessed and has a lower price point. “Cold” storage is used for archival and long term data storage and has the lowest price point. By putting less frequently accessed data in colder storage classes, storage costs can be significantly reduced.

How to do itConsider Amazon S3 Intelligent Tiering, which automatically moves data to the most cost effective tier without the customer needing to understand data access patterns. Determine a regular cadence to delete archival data.


Measuring & Monitoring


What it meansUnderstanding and reporting on cost savings and business value measures, such as reporting on which instances can be turned off, which instances can be down-sized, which storage objects can be deleted, and what reserved instances to purchase. Business value measures, such as [COGS / Business Unit Cost], [Total Cost / # of Employees], or [Dev Team Cost / # of Releases], help abstract from a pure cost lens for customers who are amidst rapid change, such as migration.

Why it mattersVisibility drives action for teams. Bringing awareness to cost savings and business value measures helps identify trends, anomalies, and can lead to gamification to drive a more cost aware culture.

How to do itBegin by building a dashboard with metrics that matter most to your organization and review the outcome on a monthly cadence. Why did you choose cloud? What metrics would help validate that choice?


Design for Cost

What it meansDesigning applications with the least expensive architecture and services that will still meet your performance and security requirements.

Why it mattersA business application can be built many ways. Why make it more expensive than it needs to be? Capitalizing on cost efficient technologies such as Spot or Lambda can drive significantly increased value for companies while producing the same output as more traditional architectures.

How to do itExperiment in non-production environments using potentially more cost effective services and architect around them. Use AWS CloudFormation and the AWS Simple Monthly Calculator to identify what a workload will cost before launching it. Understand how your organization’s activities drive AWS costs and implement a continual improvement program to target and achieve cost reductions.


• Cloud Financial Management• Business Case Development & Planning• Cost & Usage Forecasting/Budgeting• Accounting for cloud spend• Cost Optimization

• Next Steps


Agenda

• Start a business case to understand value of operating in the cloud

• Make a new friend in IT and take them to lunch:• What are they doing in the cloud?• What do they like and not like?• What type of finance support would they like?• How can you keep in touch with cloud activities?

• If your organization does this, understand how you allocate IT costs (chargebacks/ showbacks) and how cloud costs are processed.

• If your organization buys reserved instances, figure out how these costs are accounted for

• Learn more about the cloud:Case Studies and Research

http://aws.amazon.com/solutions/case-studies

AWS Economics Center

http://aws.amazon.com/economics/

What can you do Monday?

Thank You!


Documents

Cloud Financial Management A New Way to Plan